Livestock Sales Due to Drought Have One More Year to Replace

Published on: 15:57PM Oct 03, 2017

The IRS released details last week on those counties in the US that qualify for livestock producers to defer their replacement period for another year.  If drought or other related weather events require livestock producers to sell breeding stock (inventory animals do not qualify), the producer can elect to defer these gains and have up to four years to roll it over into new livestock.

However, if their county or any contiguous county is listed in the IRS notice (IRS Notice 2017-53), then the producer has an additional year to purchase replacement livestock.  Several counties have been on this list for numerous years so some producers may have more than 5 years to replace livestock.

As we have indicated in the past, many times it is better to report the sale and pay capital gains tax on the sale (assuming you held the livestock for the appropriate time period) and then deduct the replacement livestock as you purchase them using Section 179.  Let's look at an example:

Assume Rancher John sells an extra $100,000 of raised breeding stock.  Since he has held this breeding stock for two years, it qualifies for the 15% capital gains rate and he pays $15,000.  Two years later he purchases $100,000 of replacement breeding stock when he is the in the 25% bracket and deducts this cost using Section 179.  He will save $25,000 that year and be $10,000 ahead.  However, he does have to pay the tax before he can get the tax savings.  If he replaces in the same year, the producer may elect to defer the gain for one year under another provision and get his tax savings on the purchase.

As you can see, livestock producers "tax return" can stay open for many years.  If they do not purchase replacement livestock within the allowed time limit, they must go back and pay income tax plus interest.